Billionaire hedge fund manager Christopher Hohn urged Canadian National Railway Co. to halt its takeover of the U.S. railway, calling the US$29.9-billion proposal risky and overpriced while throwing his support behind Canadian Pacific Railway Ltd. ’s deal.
Mr. Hohn’s London-based TCI Fund Management Ltd. is CN’s fifth-largest shareholder, with a 3-per-cent stake worth about $2.7-billion, and the biggest investor in CP, with $5.2-billion in shares.
In an open letter to CN, Mr. Hohn and partner Ben Walker declared the railway’s pursuit of KCS “negligent and hugely irresponsible” in light of the U.S. regulatory hurdles that CN faces.
CP and KCS announced in March that they had a friendly deal in which CP would buy the Missouri-based railway for US$25.2-billion in cash and stock. CN stepped up in April with an offer worth about 20 per cent more, topping CP and winning the support of KCS’s board.
However, CN must now win approval from the U.S. regulator, the Surface Transportation Board, for the creation of the voting trust in which it will hold KCS shares while awaiting STB approval for the takeover. CN must pay KCS $1-billion if the STB rejects the voting trust application. Additionally, CN has agreed to pay US$700-million to KCS to cover the cost of terminating the CP agreement.
Mr. Walker told The Globe and Mail he supports CP’s offer for KCS because it has already won approval for the voting trust, and will be judged by the U.S. regulator on easier terms. “CP was not involved in our decision in any way,” Mr. Walker said. “We have had no contact with them at all in regard to this matter.”
The STB on Monday signalled it would subject CN’s voting trust application to a strict review, adding the “use of a voting trust is a privilege not a right.” The STB also questioned the amount of debt CN would amass in the deal, citing the financial risks to CN and the U.S. rail network should the takeover be rejected and CN be forced to sell KCS at a discount to a third party.
“While CN contends that there is ‘no cause for concern’ as to whether a sale out of divestiture would ‘harm CN’s financial integrity,’ the level of debt being utilized by CN to fund the proposed merger, as well as the substantial premium CN has offered for KCS, call this assumption into question,” the STB said on Monday.
Voting trusts are a feature of U.S. railway takeovers intended to preserve the target’s independence and operating integrity during the regulatory approval process. CP’s proposed voting trust has already received STB approval. On the CP-KCS takeover itself, the STB said in a preliminary ruling in April the proposal raises few anti-competitive issues, given the combined companies would be the smallest of the large seven carriers in the United States.
The CN-KCS deal and voting trust will be subject to tougher public interest and competition standards, the STB said.
TCI said the STB’s Monday ruling forced it to speak out.
“In light of yesterday’s ruling, we think it is negligent and hugely irresponsible for the CN board to commit $2-billion of shareholders’ money on whether the STB will approve the voting trust for the CN-KCS transaction,” Mr. Hohn and Mr. Walker said in the letter to CN chairman Robert Pace. “It is now clear that CN should abandon its pursuit of KCS unless the merger agreement is amended such that it is not conditional on a voting trust being approved.”
CN’s offer is worth US$325 a share; a year ago, a KCS share was worth US$147.
TCI said CN could be forced to sell KCS at a loss of US$15-billion to US$18-billion if the STB rejects the takeover. “It could seriously jeopardize the future of the company,” TCI said, calling for the resignations of Mr. Pace and chief executive officer Jean-Jacques Ruest if the trust structure does not win approval.
Rob Reilly, CN’s chief operating officer, assured investors Tuesday on a webcast the company had a strong balance sheet, and the dividend was not at risk as a result of the deal. CN had a plan to pay down the US$19-bilion debt the company would take on to buy KCS, Mr. Reilly said.
Mathieu Gaudreault, a CN spokesman, said the company is confident its voting trust will receive STB approval. “CN’s board believes its pro-competitive combination with Kansas City Southern is in the best interest of CN’s shareholders and other stakeholders,” Mr. Gaudreault said.
Several major CN shareholder did not respond to questions from The Globe or declined to comment.
CN hopes to win STB approval for its voting trust by early June and support from a majority of KCS shareholders in July. Mr. Reilly said a ruling by the Mexican regulator is expected in the second half of 2021. STB approval of the takeover is expected to take well into 2022.
CN shareholders do not get a vote on the deal because it involves less than 25 per cent of outstanding shares.
KCS on May 13 said it planned to terminate the CP agreement in favour of pursuing a deal with CN, giving CP until Thursday night to respond.
Under STB merger rules, CN must show its purchase and the trust structure are in the public’s interest, and foster competition in an industry that until 21 years was becoming highly concentrated.
CP and KCS networks meet in Kansas City, and there is no overlap between the two. CN has some overlap with KCS, but the Montreal-based carrier said it will address any competition issues in the regulatory approval process.
KCS has an 11,400-kilometre network beginning in Springfield, Ill., and extending into Mexico, linking the buyer with ports on the Gulf of Mexico and the Pacific Ocean, in addition to Mexico’s growing automotive manufacturing centres. KCS employs 6,500 people.
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